GBP/JPY attracts some dip-buyers on Tuesday amid the underlying JPY bearish sentiment.
Japan’s fiscal concerns and the wide UK-Japan rate gap continue to undermine the JPY.
GBP bulls seem hesitant ahead of key UK macro data on Thursday, including the Q2 GDP.
The GBP/JPY cross recovers a modest intraday dip and climbs above the 215.00 psychological mark during the first half of the European session on Tuesday. Spot prices currently trade near an over one-week high, touched on Monday, and seem poised to appreciate further amid a broadly weaker Japanese Yen (JPY).
The brutal market reaction to a joint US-Japan intervention in late July turned out to be short-lived amid growing concerns about Japan’s worsening fiscal conditions, aggravated by Prime Minister Sanae Takaichi’s aggressive economic stimulus and tax cuts. Adding to this, the persistently wide interest rate gap between Japan and other major economies, including the UK, which has been fueling the so-called carry trade, contributes to the JPY’s underperformance and acts as a tailwind for the GBP/JPY cross.
The Bank of Japan (BoJ) lifted the short-term policy rate in June to 1.00%, or the highest since 1995, while the Bank of England’s (BoE) base rate is at 3.75%. This leaves a gap of around 275 basis points (bps). Furthermore, investors remain worried that Japan’s economy will remain under strain amid energy supply disruptions due to the Middle East conflict. Japan depends on the Middle East for roughly 95% of its crude oil, suggesting that the path of least resistance for the GBP/JPY cross remains to the upside.
Meanwhile, the British Pound (GBP) struggles to attract buyers amid a modest US Dollar (USD) strength. Traders also seem reluctant ahead of the UK data dump, including the Q2 GDP report, on Thursday, which might keep a lid on any further appreciation move for the GBP/JPY cross. Nevertheless, the fundamental backdrop validates the near-term positive outlook. This, in turn, suggests that any corrective pullback could be seen as a buying opportunity and is more likely to remain limited.
USDJPY is once again moving higher, while the yen is beginning to give back some of the gains it made following the joint intervention by Japan and the United States at the end of July. It was an exceptionally strong response from the authorities, which helped push USDJPY sharply lower in a short period of time and gave the yen some much-needed relief. The problem is that just a few days later, the market is once again testing the weakness of the Japanese currency. This shows that FX intervention can be an effective tool for stopping a sharp move, but it may not be enough to produce a lasting change in the trend. In the case of the yen, the underlying problem is much deeper. The gap between interest rates in the United States and Japan remains very wide, and this has been one of the key reasons behind the persistent pressure on the Japanese currency. The market is therefore paying increasing attention to what could happen at the Bank of Japan’s September meeting. There are growing signals that the BoJ could decide to raise interest rates again on September 17–18. Such a move would be far more important for the yen than intervention alone, as it would represent a genuine change in the interest-rate differential between Japan and the United States.
Source: xStation5
Factors Currently Driving USDJPY
Intervention Gave the Yen Some Relief, but the Effect Is Quickly Fading
At the end of July, USDJPY approached levels that were difficult for Japanese authorities to accept. The response was particularly decisive, as the United States also joined Japan in taking action this time. The joint operation quickly reversed part of the previous move and led to a strong appreciation of the yen. Initially, the effect was very clear. USDJPY fell toward 157, and the market once again began to consider the possibility of a lasting trend reversal. Today, the situation looks different. The pair is rising again, while support for the yen is starting to look increasingly fragile. The market is paying attention to the fact that Tokyo did not follow up the intervention with further aggressive action, which could indicate that policymakers primarily want to limit excessive market moves rather than permanently target a specific exchange-rate level. This is precisely why intervention alone does not solve the problem. It can stop the market for several days or weeks, but if the underlying conditions remain unchanged, pressure on the yen can quickly return.
The BoJ Needs to Do More Than Just Intervene
The most important piece of the puzzle remains the Bank of Japan’s monetary policy. The BoJ has begun the process of normalizing monetary policy and has already raised interest rates. The market is increasingly expecting that this was not the final move. Recent reports suggest that the central bank could decide to raise rates again at its September 17–18 meeting. For the yen, this would be a much more important signal than another round of FX intervention. A rate hike would narrow the interest-rate differential between US and Japanese assets, reducing the attractiveness of strategies that involve funding investments in higher-yielding currencies with the yen. For now, however, the market still needs to see whether the BoJ will actually be willing to act. The possibility of a September rate hike provides some support for the yen, but only an actual decision — combined with guidance on future moves — could change the market outlook in a more lasting way.
The Interest-Rate Differential Remains a Problem for the Yen
Even if the BoJ raises rates in September, the gap between US and Japanese interest rates will remain significant. This is where the main problem for the Japanese currency lies. The market may buy the yen for some time in anticipation of a BoJ move, but if the central bank signals a prolonged pause after the hike, the dollar’s advantage could quickly return. For this reason, a rate hike alone may not be enough. What will matter much more is whether the BoJ can convince the market that it is beginning a longer-term process of monetary policy normalization. If that happens, USDJPY could enter a more sustained downtrend. If, on the other hand, the BoJ remains cautious while the Fed keeps rates elevated for an extended period, pressure on the yen could return despite another rate hike.
The Market Is Testing Tokyo’s Credibility Again
The latest intervention was also exceptional because both Japan and the United States participated. Such a move strengthened the signal sent to the market and showed that authorities were prepared to act against excessive yen weakness. The problem, however, is that the market is already beginning to test how long that signal will remain effective. If USDJPY once again approaches the levels that previously triggered intervention, Tokyo will face a difficult choice. Another intervention would send a very strong signal, but it would become increasingly difficult to convince the market that government action can permanently reverse the trend without support from monetary policy. That is why the BoJ’s September meeting could be more important than the intervention itself. The market will want to see whether the central bank is genuinely prepared to use interest-rate policy as the second pillar in its efforts to combat yen weakness.
USDJPY Is Rising Again, but September Could Change the Picture
The current rise in USDJPY shows that the effect of the joint Japan-US intervention is gradually fading. The yen received several weeks of relief, but the fundamentals of the FX market have not changed enough to suggest that a lasting trend reversal is underway. Attention is now shifting toward the Bank of Japan. If the BoJ does indeed raise rates in September and its communication signals the possibility of further moves, the yen could receive much stronger and more durable support. If, however, the Japanese central bank raises rates but leaves the market with the impression that further hikes will be difficult to achieve, USDJPY could resume its upward move. For now, the market is showing that intervention alone has not been enough. Japan needs not only to sell dollars and buy yen, but above all to narrow the interest-rate differential. This is precisely why the BoJ’s September meeting could be one of the most important events for USDJPY during the entire third quarter.
Key Takeaways
USDJPY is rising again, showing that the effect of the latest joint Japan-US intervention is beginning to fade.
The intervention helped strengthen the yen sharply, but it did not change the underlying fundamentals of the market.
The key factor for the yen remains the large interest-rate differential between the United States and Japan.
The market is increasingly pricing in the possibility of another BoJ rate hike at the September 17–18 meeting.
If the BoJ signals further monetary policy normalization, the yen could receive significantly more durable support than it did from intervention alone.
If the Japanese central bank remains cautious, USDJPY could come under renewed upward pressure.
For the yen, the key question is therefore not whether Tokyo can intervene again, but whether the BoJ is prepared to raise rates quickly enough to actually change the fundamentals behind the Japanese currency’s weakness.
Following a record intervention by the Japanese Ministry of Finance and the US Department of the Treasury, the yen strengthened by over 5%, recovering losses incurred over the last 5 months, since the outbreak of the war in Iran. After reaching a local low below the 156 level, the USDJPY pair has returned to growth.
The fundamentals have not changed significantly and continue to exert pressure on the Japanese currency. The key issue remains the carry trade, or trading on the interest rate differential. As long as the discrepancy between the projected interest rate levels in the United States and Japan remains significant, even interventions amounting to nearly 90 billion dollars may prove insufficient to permanently reverse the trend. Figure 2: USDJPY (31.10.2025 – 10.08.2026)
Source: xStation, 10.08.2026 Currently, the interest rate differential between both sides of the ocean stands at 2.675%. Market valuations suggest that it will narrow slightly in the coming months, reaching approximately 2.35% in July 2027. However, it seems that investors expect more decisive action from the Bank of Japan, with the next opportunity appearing only on 18 September. A decision to raise interest rates then could serve as a significant declaration for the market, leading to increased bets on subsequent hikes in the following months. Currently, such a move is priced at approximately 60%.
Figure 3: Bank of Japan Implied Policy Path (Hikes/Cuts) (2026-2027)
Source: XTB Research, 10.08.2026 In the meantime, the market’s attention will focus on the United States and the developing situation in the Middle East. Japan is almost entirely dependent on imports for its energy needs, and under standard conditions, nearly 90% of its crude oil comes from the Middle East. Figure 4: Japan’s Crude Oil Import Structure (2024)
Source: OEC, 10.08.2026 However, further interventions cannot be ruled out, which the markets seem to fear. Positioning on the yen has changed significantly after many investors withdrew speculative short positions for fear of further actions aimed at defending the exchange rate. Figure 5: Yen Positioning (2000 – 2026)
Source: XTB Research, 10.08.2026
US Dollar (USD)
The July NFP report has been published. The number of new jobs in the US economy fell by 23 thousand, missing expectations by 5 standard deviations. Although extreme phenomena occur much more frequently in the world of macroeconomics (the so-called fat tails), assuming the data follows a normal distribution, we would have to wait 290,000 years for another such reading. Figure 6: NFP and Employment Component in ISM PMI (2016 – 2026)
Source: XTB Research, 10.08.2026 The market reaction was certainly noticeable, though not as strong as many might have expected. The dollar’s losses were limited by, among other things, a decline in the unemployment rate (to 4.1%) and problems with seasonal adjustment of the data (the decline resulted mainly from a lower number of jobs in the public education sector). Figure 7: NFP and Unemployment Rate (1980 – 2026)
Source: XTB Research, 10.08.2026 It is worth noting, however, that higher energy prices have affected companies in the retail, leisure, and hospitality sectors (this despite the World Cup ending in July). Investors are currently unsure which direction the Fed will take in September; looking at market valuations, the chances of a hike can be compared to a coin toss. All eyes are on the July inflation reading scheduled for Wednesday. If, despite rising oil and gas prices, it shows similar values to June, we expect the committee led by Kevin Warsh to refrain from a hike until the next meeting. Figure 8: US CPI Inflation (2004 – 2026)
Source: XTB Research, 10.08.2026 For Warsh himself, this would be an exceptionally comfortable situation. In the event of intensifying inflation concerns, the committee would be almost forced to raise rates, especially in the face of revived discussions regarding the Fed’s independence. The topic returned to the table after further threats from Donald Trump directed at Lisa Cook, one of the FOMC decision-makers. These appeared more than a month after the Supreme Court deemed the president’s recent actions in this area unlawful.
EUR/JPY could find primary support at the nine-day EMA at 183.34.
The 14-day Relative Strength Index at 47.63 indicates prevailing bearish bias.
The initial barrier lies at the 50-day EMA at 184.57.
EUR/JPY depreciates after registering modest gains in the previous day, trading around 183.80 during the Asian hours on Tuesday. The Relative Strength Index (14) at 47.63 sits just below the neutral 50 line, hinting at ongoing bearish momentum without yet reaching oversold conditions.
The EUR/JPY cross is holding a mildly bearish near-term bias as it remains below the 50-day Exponential Moving Average (EMA) while it is positioned just above the nine-day EMA. This configuration suggests the cross is caught between short-term support and overhead trend resistance, with price action vulnerable to further downside while the longer EMA caps the topside.
The initial support lies at the nine-day EMA at 183.34. A successful break below the short-term moving average would reinforce the bearish bias and put downward pressure on the EUR/JPY cross to fall toward the eight-month low of 179.37, reached on August 3, followed by the nine-month low of 175.70.
On the upside, the EUR/JPY cross could rise toward the primary resistance at the 50-day EMA at 184.57. Further advances above the medium-term moving average would cause a bullish emergence and support the currency cross to explore the region around the all-time high of 187.95, which was recorded on April 17.
Markets edge toward BoJ tightening as hike odds firm into year-end
BNY’s Wee Khoon Chong notes that policy expectations have shifted meaningfully, with “markets now pricing in roughly a 50% chance of a 25bp BoJ hike in September and a full hike by year-end,” underscoring the growing conviction that the BoJ will move further away from its ultra-accommodative stance over the coming months.
Japanese Yen holds steady during Mountain Day holiday while markets weigh potential intervention amid thin liquidity.
The BoJ may raise rates in September to counter inflation from a weak yen and rising oil.
A weak July US payrolls report created headwinds for the US Dollar, introducing rate uncertainty following dovish policy repricing.
USD/JPY moves little after posting nearly 1% gains in the previous day, trading around 159.30 during the Asian hours on Tuesday. The pair moved little today, trading in tight ranges as market volumes remained thin with Japanese markets closed for the Mountain Day holiday.
The Japanese Yen (JPY) has retraced about half of the gains made during its recent intervention-driven rally, directly testing the resolve of officials in both Tokyo and Washington to support the currency.
According to a Reuters analyst, Japan’s decision not to follow through on its joint intervention, especially by failing to amplify Friday’s US Dollar (USD) weakness following soft US jobs data, suggests a passive strategy designed merely to slow the Dollar’s rise rather than fundamentally reverse the Yen’s multi-year decline. This distinction is critical for market positioning, as investors remain heavily short on the Yen, holding the largest net-short positions since early 2024. With liquidity reduced, analysts note that Tuesday’s holiday in Japan could serve as a prime strategic window for authorities to launch another intervention.
Meanwhile, monetary policy expectations in Japan continue to shift. According to Jiji Press, the Bank of Japan (BoJ) may consider another interest rate increase at its upcoming September 17–18 meeting, following its rate hike in June, to combat growing inflationary risks. Domestic prices face upward pressure from rapid growth in artificial intelligence-related demand, the Yen’s ongoing depreciation, and elevated global crude oil prices. A September hike would mark an accelerated timeline for the central bank, upending the consensus among financial market participants who had previously anticipated rate increases roughly once every six months.
Yen rates market leans toward BoJ lift-off by year-end
BNY’s Wee Khoon Chong notes that rate expectations have shifted meaningfully, with markets now “pricing in roughly a 50% chance of a 25bp BoJ hike in September and a full hike by year-end,” underscoring growing conviction that the BoJ will begin normalising policy over the coming months.
The USD/JPY pair holds losses as the US Dollar (USD) faces headwinds following a weaker-than-expected July payrolls report. The soft labor data sparked a dovish shift in market expectations, reintroducing two-sided policy risk into a market that had previously expected the Federal Reserve (Fed) to keep interest rates strictly on hold.
However, the US Dollar may regain its ground as geopolitical tension has driven a sharp rally in crude oil, which in turn has pushed Treasury yields higher. Concerns are growing that the Federal Reserve (Fed) may feel compelled to raise rates sooner rather than later, even against the backdrop of a cooling labor market.
Investors are now closely watching upcoming inflation data this week to gauge the Fed’s next move, with the CME FedWatch Tool showing that market-implied odds of a 25-basis-point Fed rate hike in September have climbed above 51%, up from 44.4% just a day prior.
Barkin flags uneasy labor tone but strong earnings keep Fed bias hawkish
Barkin’s latest remarks strike a cautiously uneasy tone on the labor market, with the description of “low hire, low fire” and a “sector in weak balance” pointing to softer job dynamics despite no acute stress. The FXS Speechtracker score of 5.4/10 sits slightly below the historical average of 5.8/10, underscoring a modestly less confident stance, even as Barkin highlights “quite strong” and “growing nicely” corporate earnings and explicitly watches those earnings for linkages to the job market. Overall, the mix of labor unease and solid corporate performance suggests a nuanced policy bias that is less upbeat than the established baseline but not decisively dovish for the Dollar.
The FXS Fed Sentiment Index fell by 1.68 points to 137.01, signaling a pullback in hawkish tone relative to recent communications. However, with the FXS Fed Sentiment Index still well above the neutral 100 mark, the Fed remains firmly in hawkish territory despite the softer labor rhetoric captured in the FXS Speechtracker.
The USD/JPY exchange rate quickly recouped most of the losses triggered by the weak US labour market report and is trading on Monday around 158.20–158.50, virtually where the pair stood prior to the data release. Friday’s payrolls figures showed a fall in employment of 23,000 against an expected increase of 80,000, triggering a sharp sell-off in the dollar and sending USD/JPY down from around 158.30 to approximately 156.70, before buyers quickly returned to the market. The market’s attention is now turning to Wednesday’s release of the US CPI for July, which will determine whether the Federal Reserve still has scope for a rate rise in September.
What the daily chart shows
The attached daily USD/JPY chart (D1 timeframe) shows a clear, well-defined uptrend that has been in place since February, with the price moving consistently along or above one standard deviation below the anchored VWAP since the start of 2026 (as the main support zone for the long-term uptrend). A key element of the chart pattern is the broad resistance zone around 159,000–160,000, marked on the chart as “Resistance area” – the same level which previously, from March to May, acted as a consolidation zone and repeatedly rejected price movements (and currently constitutes the main cluster of the value zone when looking at the volume profile marked since the start of the year), Friday’s long red candle with a long lower shadow was a reaction to the weak payrolls figures – there was a sharp fall from around 163,000–164,000 towards the resistance level, followed by a rebound that saw the week close near 158,500. The current price (158,496) sits right at the lower end of the resistance zone, just below the 159,000 level, suggesting that the market is testing whether the former resistance will now turn into new support.
What’s next for the couple?
The balance of risks remains uncertain, but for the time being it may appear to be tilted slightly towards gains as long as tensions surrounding the US–Iran conflict and the Strait of Hormuz persist, which is keeping bond yields higher (10-year US bonds are still around 4.655 per cent). At the same time, the risk of another joint US–Japan intervention is likely to cap gains around the 160 level, whilst a significantly weaker CPI reading could pave the way for a decline to the 155–156 range, where investors have previously been keen to buy on dips. Wednesday’s CPI reading for July (forecast at 3.4% y/y, down from 3.5% previously) will be a key test for the pair’s future direction, as it will determine whether the market will continue to scale back expectations of a Fed rate rise in September and reverse the trend, or whether the current narrative will prevail.
GBP/JPY gains strong positive traction at the start of a new week amid a broadly weaker JPY.
Japan’s fiscal concerns offset the recent intervention and exert heavy pressure on the JPY.
The wide UK-Japan rate gap keeps the JPY carry trade active and further supports spot prices.
The GBP/JPY cross catches aggressive bids at the start of a new week and builds on its strong recovery move from the vicinity of mid-209.00s, or the lowest level since early March touched last Monday. The momentum lifts spot prices to an over one-week high, around the 214.00 neighborhood, during the early part of the European session and is sponsored by a broadly weaker Japanese Yen (JPY).
Following a brief surge driven by a joint US-Japan intervention, the JPY resumes its downtrend amid concerns about Japan’s worsening fiscal conditions stemming from Prime Minister Sanae Takaichi’s aggressive economic stimulus and tax cuts. In fact, Japan’s ruling Liberal Democratic Party (LDP) backed a proposal to cut the food consumption tax from 8% to 1% for two years starting in April 2027. Adding to this, the Japanese government proposed roughly ¥600 billion a year in cash transfers targeted at low- and middle-income households as part of a relief package.
Furthermore, the wide interest rate gaps between Japan and other major economies, including the UK, keep the so-called carry trade active and exert additional pressure on the JPY. The Bank of Japan (BoJ) lifted the short-term policy rate in June to 1.00%, or the highest since 1995, while the Bank of England’s (BoE) base rate is at 3.75%. This leaves a gap of around 275 basis points (bps), which, in turn, favors GBP/JPY bulls. Meanwhile, the strong intraday move up seems rather unaffected by a relatively hawkish BoJ Summary of Opinions from the July 30-31 meeting.
Market participants now look to this week’s release of the quarterly UK GDP report, which will play a key role in influencing the British Pound (GBP). The aforementioned fundamental backdrop, however, suggests that the recent corrective decline from the 219.60 region, or a multi-year top touched in July, has run its course and backs the case for a further near-term appreciating move for the GBP/JPY cross.
USD/JPY rises as split BoJ board views on future rate hikes keep the Yen on the defensive.
Japan logged an unexpected June current account deficit of JPY 92.3 billion, its first in 17 months, on large foreign dividend payouts.
Escalating US-Iran tensions boost the Dollar, driving the USD/JPY pair higher.
USD/JPY gains ground after registering modest losses in the previous day, trading around 158.20 during the Asian hours on Monday. The pair remains stronger as the Japanese Yen (JPY) holds losses following the release of the Bank of Japan’s (BoJ) Summary of Opinions from its July 30–31 monetary policy meeting.
The summary suggested a clear division among board members; while some advocated for holding interest rates steady to evaluate the lagged impact of previous rate hikes, others pushed to maintain or even accelerate the tightening cycle, citing rising upside risks to prices. Despite members noting that Middle East tensions are weighing on economic activity, they highlighted that robust AI-related demand and a moderately recovering domestic economy continue to provide an offset.
Japan recorded its first current account deficit in 17 months in June, driven by high dividend payouts to overseas investors who have been pouring capital into domestic markets. According to Finance Ministry data released Monday, the deficit hit JPY 92.3 billion ($584.51 million), wildly missing economists’ median forecast of a JPY 1.51 trillion surplus in a Reuters poll, and down sharply from a JPY 1.28 trillion surplus a year earlier.
The USD/JPY pair rises as the US Dollar (USD) continues to draw support from broad risk aversion. Geopolitical tensions remain high as the ongoing US-Iran conflict enters a critical diplomatic phase, with intense military engagements and strategic pressure surrounding the Strait of Hormuz driving market caution. Although Iranian officials noted on Sunday that Oman-mediated negotiations regarding the management of the strait are making progress, safe-haven demand for the Greenback remains firmly intact.
Fed expectations seen driving scope for lower yields
According to TD Securities, the risk of another Fed hike “lingers,” but the bank argues that upcoming inflation data could be pivotal for rate expectations. The team notes that their projections for this week’s CPI — “core and headline CPI this week (0.20% m/m and 0.15% m/m, respectively)” — would “likely lead to further pricing out of hikes.” With “the majority of the recent move higher in rates driven by Fed expectations,” TD Securities adds that “rates could move lower as hikes are priced out.”
Musalem flags persistent inflation risks as Fed bias stays hawkish
Fed’s Musalem delivered a modestly more hawkish tone, with the FXS Speechtracker score at 7.4 versus a 7.0 historical baseline, underscoring concern that inflation expectations could risk losing their anchor even as they are currently described as stable and aligned with the 2% target. Emphasis on core inflation amid energy volatility, a preference for incremental rate hikes, and an assessment that core inflation likely sits between 2.5% and 3%—alongside a stated willingness to surprise markets when needed—reinforce a bias toward tighter policy and a higher-for-longer stance. The assertion that the Dollar’s reserve status is not under threat and that the United States remains the fastest-growing, most innovative economy with strong rule of law further supports a constructive backdrop for the Dollar, especially as financial conditions are still seen as highly accommodative and many asset prices remain elevated.
The FXS Fed Sentiment Index was unchanged, moving 0.00 points to hold at a hawkish 138.69, signaling that despite the slightly above-baseline speech score, the broader policy tone remains consistently restrictive rather than newly escalated. With the index firmly above the neutral 100 mark and aligned with the elevated FXS Speechtracker reading, markets are likely to interpret Musalem’s remarks as reinforcing existing expectations for a cautious, data-dependent path that leans toward additional tightening if inflation fails to move sustainably closer to the 2% target.
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